Government exempts capital gains tax on FPI investment in G-Secs

The Government of India (GoI) on Friday (June 5, 2026) waived the 12.5% long term capital gains tax (LTCG) charged on foreign institutional investment in government bonds.

The exemption will be applicable from April 1, 2026. “Recognising the importance of a competitive tax regime in attracting global capital, the Government has decided to rationalise the tax treatment applicable to investments by FPIs in Government Securities, by exempting such investments from income tax on any interest or capital gain. This step will align the taxation on G-Secs with many comparable jurisdictions,” the Finance Ministry said in a statement.

Further, the government also announced that 15, 30, and 40-year tenor bonds will be added to investment under fully accessible route (FAR) framework, which allows non-residents to invest in specific government securities, known as “specified securities,” without facing any quantitative restrictions. Sovereign Green Bonds (SGBs) have also been included in the FAR basket of securities. Caps on investment, concentration and security wise limits on FPI investment through the general route were also removed while keeping the overall quantitative investment limit of six percent of the outstanding stock of the Central Government securities and 2% of the State Government securities (SGSs).

The move comes at a time when FIIs sold ₹2.5 lakh crore worth of Indian securities, going by data from NSDL. However the larger part of the exit came on account of selling in equity and not debt securities. To be sure, FIIs have been net buyers of FAR bonds in four of the past six month in calendar year 2026. As of June 5 2026, FIIs bought ₹16,567 crore in FAR bonds and sold just ₹4025 crore in general route. In equities however, the sales has been over ₹2.6 lakh crore , being one of the significant sources of rupee depreciation against the dollar.

Experts while welcoming the move also are cautious of the intended effects on the FII flows.

“The two pools of capital are different investors with different mandates and different return expectations. Making gilts cheaper to own does not address why long-only equity investors have been cautious on India. The capital gains structure, the currency risk, the valuation premium over peers. That is where the silence is. The real ask from foreign investors has always been on equities. That remains unanswered,” said Sachin Sawrikar, Founder and Managing Partner, Artha Bharat Investment Managers

Further expanding the limit for Person of Indian Origin and NRIs to invest in Indian stock markets were announced in the budget. The notification amending the Foreign Exchange Management Act has also been made, according to the statement. To be sure, the share of NRIs in Nifty listed companies have not crossed 1% in the past decade.